Borrowing on home equity

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What are the different options?

The four most common ways of using your home equity to get extra financing before the end of your current term are:  
  1. Refinancing
  2. Borrowing any amount you prepaid
  3. Home equity line of credit
  4. Second mortgages 

The benefit of using one of these options rather than another kind of loan, such as a personal loan or a credit card, is that interest rates on loans secured with home equity can be much lower.  

Remember:
  • You must qualify for these home equity borrowing options.
  • Don’t borrow more than you can afford. If you are unable to repay the amounts you have borrowed, plus interest, you could lose your home.
 
 
 
 
 
 

1. Refinancing

Some mortgage lenders offer their customers refinancing options. This allows home owners to access the equity they have built up over time. Refinancing may involve changing the terms of your original mortgage agreement, and the refinanced portion may have a different interest rate than the original mortgage. You may have to pay fees in order to do this. 

You can borrow up to 80 percent of the appraised value of your home, minus the amount left to pay on your first mortgage.  

Example:

Louise is planning a home renovation project and is looking at refinancing her home to fund the renovation. Her house is currently worth $200,000 on the real estate market, and she still has $100,000 left to pay on her mortgage. Her mortgage lender calculates her credit limit for refinancing as follows:

Appraised value of home:​    $200,000
Maximum loan allowed:​          x 80%​
Loan amount based on appraised value:​ = $160,000​
Less balance owed on mortgage:​ $100,000​
Refinancing credit limit:
    $60,000

If the lender and Louise agree to refinance her home to the $60,000 limit, she would owe a total of $160,000 on her mortgage. 

2. Borrowing amounts you prepaid

Some lenders offer their customers prepayment options that help them to pay their mortgages off faster, such as making lump-sum payments. 

If you have made prepayments, your lender may allow you to re-borrow the amount you have prepaid on your mortgage. These newly borrowed funds will be added to the balance of your mortgage principal. The interest rate may be different from the rest of your mortgage for the remaining term

Example:

  • Allan’s original mortgage payment schedule showed that he would have $100,000 left in principal to pay on his mortgage after making payments for three years.
  • During those three years, Allan also prepaid $20,000 against his mortgage, leaving him with $80,000 ($100,000 – $20,000) in principal to pay off.
  • Allan wants to do home renovations that will cost $10,000.
  • His financial institution allows him to borrow $10,000 from his prepaid amount without having to make any changes to his mortgage term.
  • After borrowing the money, Allan’s outstanding mortgage principal is $90,000 ($80,000 + $10,000). 

3. Home equity lines of credit

A home equity line of credit (HELOC) works much like a regular line of credit. You can borrow money whenever you want, up to the credit limit. You can pay it back and borrow again. You have to apply for a home equity line of credit to find out whether you qualify. 

The Office of the Superintendent of Financial Institutions (OSFI) has issued guidelines for federally regulated lenders such as banks that address the maximum amount for HELOCs. OSFI expects federally regulated lenders to limit new HELOCs to 65% of your home’s appraised value. A HELOC can be combined with a regular mortgage for a maximum of 80% of your home’s appraised value. 

Example: 

  • Nicole would like to get a home equity line of credit to use for a home renovation.
  • Her house is currently worth $200,000 on the real estate market, and she still has $100,000 left to pay on her mortgage.
  • Her mortgage lender calculates her home equity line of credit limit as follows: 
Appraised value of home:​    $200,000
Potential maximum for HELOC and regular mortgage combine, based on appraised value (maximum 80%):​ = $160,000​
Less balance owed on mortgage:​ $100,000​
Maximum credit limit on HELOC:
    $60,000
Note: as Nicole pays off more of her mortgage, she will be able to borrow additional funds with her HELOC, up to a maximum of $130,000 (or 65% of her home’s appraised value of $200,000).  

4. Second mortgages

A second mortgage is a second loan that you take and secure with your home equity, in addition to your original mortgage, with a different mortgage lender. While making payments on your second mortgage, you also continue to make the payments on the original mortgage. 

The term “second” indicates that a second loan is registered against your home in addition to the first mortgage. If the loan goes into default—that is, if you cannot continue to make your payments and your home is sold to pay off the mortgage—your original mortgage lender has priority and would be paid before any funds go toward the second mortgage lender. Therefore, a second mortgage is riskier for mortgage lenders. This is why interest rates on second mortgages are usually higher than on first mortgages

You can borrow up to 80% of the appraised value of your home, minus the amount left to pay on your first mortgage.  

 

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